DEPRESSION-ERA LAW BARRING BANKS FROM STOCKS, BONDS MAY BE REPEALED

For years bankers steadily chipped away at a key Depression-era law they said handicapped America's banks from competing in a modern financial era.

Now key elements of the Glass-Steagall Act of 1933, which limits banking companies from dealing in stocks and bonds, may be repealed.That law is one of the toughest reforms to emerge from the bank failures in the 1930s. It's designed to prevent banks from engaging in speculative investments and threatening confidence in the industry.

Glass-Steagall's demise began in the late 1970s, when bank industry attorneys sought permission for bank subsidiaries to underwrite certain types of bonds.

Commercial bankers pushed for loosening Glass-Steagall after seeing customers take their investments to other financial services companies that offer a greater range of options.

In 1987 the Federal Reserve, which has regulatory authority over banks, relented and let them engage in limited underwriting of some bonds so long as the deals were conducted through a non-bank subsidiary.

The Fed, in a decision later upheld by the U.S. Supreme Court, let the subsidiaries underwrite municipal bonds, mortgage-related securities and commercial paper, a form of corporate IOU.

There were several important restraints: subsidiaries' revenue could not exceed 5 percent from these deals. The rest had to come from dealings in safe government bonds. In 1989, that limit went to 10 percent.

Also, the banking companies were banned from using bank assets to support their sister companies dealing in securities. This was one of 30 so-called firewalls erected between the banks and their sister firms to isolate the risk of securities deals, prevent intermingling of funds and ensure solvency of the parent banking companies.

Also in 1989, the Fed allowed banking companies to deal in additional types of bonds and, for the first time, stocks. Only a handful of the healthiest banks could apply for such powers on a case-by-case basis. Currently, 10 large domestic and foreign banks enjoy the ability to underwrite bonds, stocks or both.

The banking subsidiaries used their new powers to underwrite about $69 billion in the securities previously denied to them in the third quarter of 1989, the most recent figures available, according to the General Accounting Office, Congress' investigative arm.

Combining all their business in government issues and their new securities powers, revenues for non-banking companies in the second quarter of 1989 were 7 percent of the industry, the GAO reported.

Roger Cohen, a banking law expert at the New York law firm of Sullivan and Cromwell, said the early easing of Glass Steagall showed the Fed was "`willing to go in moderate steps."

"I think the Fed felt, for prudent financial reasons, they shouldn't dismantle it all at once," Cohen said.